Satisficing, optimizing, "disciplining", value added, profit
As a premise, the technical term for "doing well enough" is "satisficing" and many people do not have an optimizing approach to their lives, they just have a satisficing one.
As another premise, there are different concept about commercial organizations:
The activity of the organization, the "business".
The organization running the busines, the "firm", and the executives who control it.
The owners of the firm, the "corporation", and the board that control it.
There is another important concept, that of "disciplining", that is what incentivizes the people of the firm to be efficient in carrying out the business.
The general rule is that the primary "disciplining" mechanism for firms is bankruptcy. However, avoiding bankruptcy only merely requires satisficing, as to profits: two firms can be solvent at very different levels of profitability and continue to exist, for example if one squeezes harder their workforce or other suppliers. They may have the same level of value-added; the firm with the higher profit may even have lower value-added.
Some time ago Michael Jensen argued (1, 2) that the main disciplining mechanism should be the stock price of the corporation owning the firm and its influence on the incentives of its executives by giving them stock shares as pay.
This turned into a series of changes to increase the importance of stock share prices more than just stock share based pay for executives, most importantly changes in rules for "hostile" corporate takeovers that made them much easier; in a hostile takeover as a rule a corporation that owns a firm that has higher profits buys a corporation that owns a firm that has lower profits, because the higher profits means that is has the means to buy the other corporation, either cash or with stock shares, as higher profits means a relatively higher stock share price, with these consequences:
After the threat of bankruptcy, the effective discipling mechanism is not the nature of executive pay, but the threat of hostile takeovers because in a hostile takeover the first people to lose their jobs are the executives, and then how they are paid or the bankuptcy of the firm no longer matter.
In order to make their owning corporation less likely to be the target of a hostile takeover the executives of the firm must aim to optimize its reported profits, to make its total stock share price as unaffordable as possible.
The profits to optimize must be the short-run reported profits, because it is those that drive the corporation stock share price, and executive tenure is usually only a few years.
So firm executives in addition to satisficing the condition of avoiding bankruptcy are subject to optimizing short run reported profits; it is quite easier for them to do so than by optimizing the value added of the firm, because the involves outcompeting other firms to increase sales or to improve overall efficiency, so usually firm executives choose much easier alternatives of optimizing what they can directly control:
Increasing the share of value added that goes to profits by shrinking the share that goes to wages, as employees usually depend on the firm more than its customers do.
Changing the reporting of profits so that the reporting be more optimistic as to short-run profits, usually by recognizing revenue as early as possible and expenses as late as possible or by under-reserving for risk, that is by recognizing as profit the revenue from disguised forms of asset stripping.
Therefore in practice in the long rung firms satisficing the avoidance of bankruptcy works better at increasing the efficiency of their businesses, because:
Increases in the efficiencies of the businesses of the best firms will tend to drive less efficient businesses to bankruptcy as they will be able to better fund lower prices or more capital or worker investment. That is competition in the long run turns satisficing not going bankrupt into optimizing value added.
Increases in reported profits will be the aim of executives more than increasing value added and running the business as a going concern and increasing its capital, thus in the long term making it harder to satisfice the avoidance of bankruptcy.
As to the latter point however up to the moment where the optimization of profit drives the firm into bankruptcy, in the short run executives and other short term investors will benefit from higher reported profits and stock share prices.
